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The Charts That Matter Most

07/23/2012

In what is shaping up to be a classic “summertime” market, let’s take a look at some charts to gain some overall perspective. Once doing so, I think you may agree with my expectations expressed within my recent quarterly commentary, “The Trend is Your Friend.”

“Individual investors would be wise to follow the lead of good money managers who know that sometimes it’s best to do nothing instead of something during sideways-trading ranges. I’d be more inclined to ‘sit on my hands’ at such a time.” For the third quarter, let’s elaborate on that and add - if the evidence suggests we should assume more calculated risk, do so remembering I prefer assets “where the trend is your friend!”

1.S&P 500® INDEX (SPX)

First up, the SPX, on the anniversary of the debt ceiling debacle in D.C., which was presented to the markets on Friday afternoon, July 22, 2011 by dual press conferences from President Obama and Speaker Boehner. It is both interesting and disturbing that the SPX is basically unchanged during that period. On July 22, 2011, the SPX closed at 1345.02, while on Friday July 20, 2012, it closed slightly higher at 1362.66.

Keep in mind, the near-term momentum for the SPX is bullish, responding to the strong move higher on Friday, July 13. Use the Thursday, July 12 close at 1334.76 as the point of reference for neutralizing that momentum. Overhead strong resistance from Friday, May 4, 2012 jobs report at 1385.00-1391.00 is in place.

S&P 500 Index (SPX), July 21, 2011 to July 22, 2012

Source: Bloomberg

2.EUROCURRENCY

The eurocurrency closed on Friday at 1.2157, its lowest weekly close since 1.2112 on June 11, 2010. A weekly close below 1.2112 will present a rather ominous picture for the euro with an intended target of 1.1877. Keep in mind, 1.1877 (June 7, 2010) is the lowest recorded euro price since March 2006. I suggest investors keep a watch on bond yields in Spain as an indicator for further euro weakness. On Friday, the Spanish 10-year traded at 7.284%, slightly below its 15-year high at 7.285% recorded on June 18 of this year.

Eurocurrency Weekly Chart, January 29, 2010 to July 20, 2012

Source: Bloomberg

3.GERMAN EXPORTS

There is one favorable consequence to the value of the eurocurrency declining – and that is German exports rising. In fact, that is exactly what was reported on July 9; exports climbed 4.2% month on month. That is the largest monthly gain in two years. Where do most of those exports land? China. Worth watching.

German Exports, December 31, 2011 to July 2012

Source: Bloomberg

4.U.S. INITIAL JOBLESS CLAIMS 4 WEEK MOVING AVERAGE

Take a look at the chart below for the U.S. Initial Jobless Claims 4-week moving average. There is no coincidence that the strong first quarter performance for the SPX coincided with a sustained down trend in the 4-week moving average, from the 381,000 print on January 6 to a low print of 363,000 on March 30. Again of no coincidence is that March 30 was the trough, with consistently rising prints toward a 387,500 high on June 22. Early July readings have favorably moderated again down toward 375,000. The question becomes, will it be a calendar third quarter trend?

U.S. Initial Jobless Claims 4-Week Moving Average, July 2011 to July 2012

Source: Bloomberg

5.SECTORS

Take a look at the charts below for the Select Sector SPDR ETFs in relation to their 21-day and 200-day moving averages. The evidence from the charts does not suggest making any significant sector allocations changes in the near term.

a. Utilities appear to have very strong near-term momentum.

b. I would watch energy closely as recent price strength in the spot oil price has translated into the XLE approaching its 200-day moving average for the first time since early May.

c. Technology, consumer discretionary, and health care all remain above both the 21- and 200-day moving averages, with positive moving average slopes.

XLK Technology

Source: Bloomberg

XLY Consumer Discretionary

Source: Bloomberg

XLF Financials

Source: Bloomberg

XLV Health Care

Source: Bloomberg

XLB Materials

Source: Bloomberg

XLU Utilities

Source: Bloomberg

XLI Industrials

Source: Bloomberg

XLE Energy

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.